March, 2012

If you’re looking for an answer to the question ‘how much can you earn without paying taxes in 2012?’ then you’ve come to the right place. In our guide, we look at the changes to your Personal Allowance in 2012/13.

We also look at changes to other allowances and examine how much tax-free income you’ll be able to earn in 2012/13. Keep reading to learn more.

Your tax free income in 2012/13

Your Personal Allowance is the amount of income you are allowed to earn each year before you start to pay tax. The vast majority of taxpayers are eligible for the basic Personal Allowance. The chart below shows the basic Personal Allowance in the tax year 2011/12, the 2012/13 tax year and the increase between the two years:

Age

2011/12

Change

2012/13

Up to age 65

£7,475

+£630

£8,105

Age 65-74

£9,940

+£560

£10,500

Age 75 and over

£10,090

+£570

£10,660

This means that if you’re under the age of 65 and you’re eligible for the full Personal Allowance in 2012/13, you can earn £8,105 of income before you’ll start to pay tax.

Other allowances in 2012/13

If you are married and living together, were married before 5 December 2005 and at least one spouse was born before 6 April 1935, the husband can claim Married Couple’s Allowance.

If you are married or in a civil partnership and living together and at least one spouse or partner was born before 6 April 1935, the person with the higher income can claim Married Couple’s Allowance.

HMRC reduce your tax bill by ten per cent of the Married Couple’s Allowance to which you’re entitled. The actual amount depends on the relevant person’s income.

2011/12

Change

2012/13

Allowance

£7,295

+£410

£7,405

Minimum amount

£2,800

+£160

£2,960

If you’re certified blind and are on a local authority register of blind persons, or if you live in Scotland or Northern Ireland and you are unable to perform any work for which eyesight is essential, you can claim Blind Person’s Allowance.

Blind Person’s Allowance is rising by £120 in 2012/13 from £1,980 to £2,100.

What tax you do pay on the rest of your income

If you earn less than your allowances then you’ll generally pay no tax on your income. However, if you earn more than your total allowances then you’ll pay tax on your income above this amount at the following levels:

Tax band

2011/12

2012/13

20% – basic rate

£0 -£35,000

£0 – £34,370

40% – higher rate

£35,001 to £150,000

£34,371 to £150,000

50% – additional rate

Over £150,000

Over £150,000

You will notice that the point at which you start to pay the higher rate of Income Tax will decrease by £630 to £34,370 in 2012/13. This is to balance the £630 increase in the personal allowance for people aged under 65.

Do you pay 40% tax? Even if you don’t do so now, there’s a strong chance that you will in the next few years. 2011 predictions from the Institute for Fiscal Studies suggest that up to 3.5 million more UK taxpayers will be paying 40% income tax by 2015. Is this likely to affect you?

Increasing numbers of people are now in the 40% tax bracket and so are paying 40p in every £1 they earn over a certain amount. Keep reading to find out everything you need to know about the 40% tax bracket.

Why are more people paying 40% tax?

There is one main reason that more people are paying 40% tax. As the Chancellor, George Osborne, increases the tax free allowances – the amount you can earn without paying tax – to help low earners, he has been steadily reducing the threshold for paying 40% tax. The idea is that higher earners pay more tax in order to ease the pain on people on low incomes.

Paul Johnson from the Institute of Fiscal Studies explains: “The only way of doing that in an affordable fashion is to bring more people into the higher-rate band and that actually carries on a trend which has been going for a very long time.

“It’s not so long ago that only about one in 20 taxpayers were paying the higher rate. We think that within three or four years that’s going to be one in four or one in five, so this is a very, very big change.

“In order to prevent higher-rate taxpayers from gaining, they [the Government] have reduced the point at which you start to pay higher rate tax, thereby bringing an extra three-quarters of a million people into higher rate tax.”

When you pay the 40% tax bracket

As we saw above, the point at which you start paying 40% tax in the UK has been gradually decreasing over the last few years. The basic rate of tax has been applicable to:

The first £37,400 of your taxable income in tax year 2010/11

The first £35,000 of your taxable income in tax year 2011/12

The first £34,370 of your taxable income in tax year 2012/13

You will pay 40% tax on any taxable earnings above these amounts.

Don’t forget that your taxable income is the income left over after all your allowances and deductions have been taken into account. For example, if you’re eligible for the full basic Personal Allowance in the 2011/12 tax year (£7,475) and you earn £40,000, you won’t pay any tax at 40%. This is because your taxable income is only £32,525 – lower than the 40% tax threshold.

Remember also that you don’t pay 40% income tax on all your income if you earn more than the threshold. You pay basic rate (20%) tax on part of your earnings and 40% tax on the amount above the threshold.

For example, if you earn £50,000 and are eligible for the basic Personal Allowance in the 2012/13 tax year, your tax would be £9,884, worked out as: